Krugman’s Economics Are Going Pear Shaped Too

Paul Krugman’s political commentary has been unhinged for some time, and that has affected his thinking as an economist. As Steve Landsburg notes, Krugman’s most recent column about the economic impact of computerization, and the appropriate policy response, is nonsensical:

Paul Krugman’s latest gets my vote for his most incoherent column ever. As I understand his argument, it goes like this:

Computers are good at routine tasks.

Therefore the rewards to performing routine tasks are falling. This is true at all skill levels.

Therefore education does not always make people more productive. It makes people more productive only when it trains them to do tasks that are not better done by computers.

Therefore we need stronger labor unions and universal health care.

Say what?. The basic thesis — that there’s no point in learning to do something difficult if a computer can do it better, and that this is significantly affecting the returns to certain kinds of education — is an interesting one. The moral, of course, is that you can’t imitate your way to prosperity. If we want to be rich, we have to innovate.

Landsburg identifies one major problem with Krugman’s diagnosis and prescription, but there are many more.

For one, the entire history of economic growth and progress has been marked by the use of capital–machines, technology–to perform routine tasks, thereby relieving humans of untold drudgery, and allowing them to pursue more productive, interesting, and challenging activities. As one example, consider how various appliances have dramatically increased the productivity of household labor, thereby freeing (mainly) women from mind numbing tedium, and allowing them to perform work in the marketplace, rather than the home, and to enjoy more leisure if it suits them. More examples could be produced ad nauseum. Think farm work was fun? Old time factory work?

Yes, technological shocks can often depreciate the value of some skills–some human capital. But part of the genius of the market system is to find new ways to utilize resources that are freed up by these technological shocks. that’s part of the function of entrepreneurship: to respond to changing circumstances by discovering new and productive ways to utilize available resources.

In brief, we’ve had several centuries of technological innovation that made certain skills obsolete, but we’ve grown remarkably wealthy nonetheless (pace Deirdre McCloskey’s factor of 30–or 100). The ability to do some things more efficiently has allowed us to do more of those things, and more other things to. Why should things really be different this time? Maybe they will be–but then it’s incumbent on people like Krugman to explain why.

In prescribing unions as a way to mitigate the impacts of technological change on those possessing a particular set of skills readily replaced by technology, Krugman really goes off the rails.

He ignores the general equilibrium effects of unionization. Unions raise the wages in unionized sectors by restricting the amount of employment in those sectors. But this increases the supply of labor in non-unionized sectors, reducing wages there. Thus, unionization does not raise the wages of all of those of a given skill level and type: it raises the wages of some, and depresses those of others. Moreover, the market power rent in unionized wages induces rent seeking–people expend resources trying to get a union job. (This can include choosing to remain unemployed and hoping to win the union lottery.) This is wasteful.

Indeed, the very conditions that Krugman identifies as being the reason for unionization exacerbate these effects. His premise is that computers are close substitutes for people with a certain set of skills. Unionization, by raising wages, actually induces firms to substitute capital for the (artificially) expensive labor. Moreover, if computers and this kind of labor are very close substitutes, the demand for this type of labor will be very elastic, meaning that to raise wages in a particular sector substantially, it is necessary to cut labor usage in that sector dramatically. This exacerbates the depression of wages in other, non-unionized sectors.

I could go on. Suffice it to say that Landsburg is right to point out the non sequitur in Krugman’s analysis. He–and I–only scratched the surface of the problems in Krugman’s diagnosis and quack cure.

It’s also interesting to contrast Krugman’s argument with Tyler Cowen’s Great Stagnation hypothesis. Cowen argues that the main economic problem is that we face a dearth of revolutionary productivity enhancing innovations, and indeed, that the post-70s era is one of economic stagnation due to a slowing of the pace of technological innovation. But that’s a subject for another day.

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.